The Inside Story of Obama and Boehner’s Second Failed Grand Bargain

Late last Sunday morning, House Speaker John Boehner and his No. 2, majority leader Eric Cantor, found themselves in White House Chief of Staff Bill Daley’s West Wing office talking with Treasury Secretary Tim Geithner about how tax reform, if done right, could produce $800 billion in new revenues over the next 10 years through growth and by closing loopholes. Sensitive to an anti-tax promise taken by most of the House Republicans, the negotiators felt this would be a way to raise revenues without breaking the pledge. Cantor wasn’t sure such a deal could pass the House, but Boehner had long believed tax reform would be essential to any grand bargain. Morning turned to afternoon and the meeting ended in the Oval Office with President Obama. The proposed deal would come with nearly $1.7 trillion in spending cuts, including significant concessions from Democrats on entitlements such as raising the Medicare eligibility age from 65 to 67 and other cuts to benefits. Both Cantor and Boehner left hopeful that a larger-than-anticipated deal on deficit reduction might be within their reach. It was the closest the two sides would come to a grand bargain to stem the tide of federal red ink and raise the borrowing limit.

On Tuesday morning, the long-neglected bipartisan Senate Gang of Six, which had been working for six months on a deficit reduction deal, made a surprise announcement: Not only were they all back at the table – Oklahoma Republican Tom Coburn had left the group in mid-May – but they’d agreed on a rough framework. Frustrated by weeks of inaction as leaders negotiated a bill behind closed doors, Senators from both parties happily looked into the $3.7 trillion proposal. Obama even welcomed it, saying it could help provide the basis of the deal. That night he called Boehner asking if some elements of the Gang’s plan might be used to produce more revenues — Obama worried that the revenues would still fall short of what Democrats wanted. Little did Obama know, the Gang was unwittingly about to derail his negotiations with Boehner.

Sure enough, on Wednesday morning, congressional Democrats began to grumble. If three GOP Senators – actually four, as Lamar Alexander, the Senate’s No. 3 Republican had since signed on – could embrace the Gang of Six plan, then why couldn’t Obama get Boehner to agree to more revenues? The Gang’s framework called for $2 trillion in new revenues over the next 10 years. “Mr. President, can you explain why you were offering a deal that was more generous than the Gang of Six, which you seemed to be embracing on Tuesday when you were here?” a reporter asked Obama at a Friday press conference just after the talks collapsed.

“Because what had become apparent was that Speaker Boehner had some difficulty in his caucus,” Obama responded. “There’s a group of his caucus that actually think default would be okay and have said that they would not vote for increasing the debt ceiling under any circumstances.”

Also on Wednesday morning, Office of Management and Budget Director Jack Lew was meeting with congressional staff at the White House to hammer out some of the trickier details. The bill would have to be split in two because of time constraints: Getting a grand bargain through Congress would take more than the then 13 days left before the U.S. began to cut services to avoid defaulting on its obligations on Aug 2. Most of the spending cuts would come with the first vote, before the deadline, and would include caps on discretionary spending for the next 10 budgets. The first bill would also include some short-term stimulus like an employer payroll tax holiday.

Next came the hard part: enacting sweeping tax and entitlement reform before the end of the year. Some strong incentives for deal-making were added to ensure both would get done. For Republicans, that incentive was the threat of losing the Bush tax cuts: fail to achieve entitlement and tax reform by the end of the year and the tax cuts for the wealthiest would be allowed to lapse. Knowing that the revenue increases would still be a tough sell to Republicans, Cantor’s staff suggested undoing the individual mandate in health care reform and getting rid of the Independent Payment Advisory Board (known as “death panels” to Sarah Palin). Cantor had been brought into the negotiations after his opposition brought down Obama and Boehner’s first grand bargain in early July. The Virginia Republican knows the feisty freshman class well, and if he were to sign off on a deal, it would go a long way to bringing the Tea-infused right on board. Cantor’s chief of staff argued that putting Obamacare on the table – the one thing loathed by Republicans even more than tax hikes — would make the deal harder for Republicans to resist. Perhaps too hard. The White House wasn’t keen to risk it.

The meeting ended when Lew had to leave for the Senate to brief Democrats on the state of the talks. “There was not a deal, because we had several important open issues,” a senior White House official said, describing the feeling coming out of that meeting. “But, if you had asked me, ‘Are we close?’ I would have had said, ‘Yes, we’re close.’”

Lew went to the Hill where he found a Democratic caucus in full revolt. Maryland Senator Barbara Mikulski practically yelled at him. California’s Diane Feinstein grilled him. “I’m the majority leader,” Harry Reid demanded, “why don’t I know about this deal?” There is no deal, Lew responded.

But the White House got the message: Democrats were concerned Obama was conceding too much to Republicans. So, in a 4 p.m. call on Thursday, the President went back to Boehner and upped his request for revenue increases — $400 billion more. “I understand you may not be able to come up on the revenue, and if you can’t, I’m open to doing something else,” Obama told him, according to another senior White House aide. “We can come down on the revenue and we have to lighten up the mandatories, the entitlements, a little bit. We can come together on this. We just have to get rid of putting the individual mandate in the trigger, which I think on its face is something that was brought in for reasons that were not directly related to deficit reduction.”

But Boehner argued that he didn’t see a way to raise 50% more revenue ($400 billion on top of $800 billion) without being forced to break their pledge and raise tax rates – something Boehner said would never pass the House. “I can tell you it’s not in the best interest of our country to raise taxes during this difficult economy, and it’s not in the best interests of the country to ignore the serious spending challenges we face,” Boehner told reporters in his own post-collapse press conference on Friday. “Listen, it’s time to get serious, and I’m confident that the bipartisan leaders here in the Congress can act. If the White House won’t get serious, we will.”

The Gang of Six’s plan, meanwhile, was also reverberating through the GOP’s ranks. The plan had lower tax rates – the highest was at 29% versus the 35% under the Obama/Boehner framework – with higher revenues. Both sides say these numbers weren’t realistic. But Republicans began to question if they, too, were getting the best possible deal.

Obama tried to call Boehner later on Thursday night to follow up, but Boehner didn’t return the call. Still, Obama had so much faith that there would be a deal that on Friday morning, Reid yanked Senate plans to pass their own debt ceiling version legislation so that the White House could focus on negotiations with the House. Later that afternoon, at 5:31pm, in an 11-minute call Boehner told the President – for the second time – it was over. He was again walking away from the negotiations. “At some point,” Obama said, wrapping up his post-collapse press conference, “I think if you want to be a leader, then you’ve got to lead.”

Is the deal really dead this time? Boehner’s office says yes. But Obama and congressional leaders still must find a path forward, lest the government face disaster. And so Obama, Boehner, Reid and House Minority Leader Nancy Pelosi and Vice President Joe Biden will start anew, again, at the White House on Saturday morning. “We will get an extension of the debt limit and we will not default. I am confident of that,” Obama said on Friday. “I am less confident at this point that people are willing to step up to the plate and actually deal with the underlying problem of debt and deficits. That requires tough choices.” And the time for making them has almost run out.